Insuring Against Terrorism

Although Insurers Have to Do It, There Are Catches

By Art Bruinooge

Terrorism risk was once seldom excluded from commercial property and liability policies in the United States. Then came Sept. 11 – when insured losses amounted to about $40 billion. So hard did it become afterward to obtain terrorism insurance that Congress had to pass an act compelling insurers to offer it.

The Terrorism Risk Insurance Act of 2002 established a “mandatory offer” program that guarantees the availability of terrorism coverage for commercial policyholders. The requirement is in effect until December 31, 2004.

But the interest from businesses has not been overwhelming. Unless located at an airport, near a major utility or at another strategic infrastructure or government location, most businesses outside of a metropolitan area have difficulty envisioning a terrorism loss to their business property. And since insurers may charge for terrorism coverage, many of these businesses elect not to buy it.

The coverage on terrorists policies is usually limited to terrorist acts committed on behalf of a foreign interest that occur on U.S. soil or at other American sites and are part of an effort to coerce U.S. citizens or government policy. Not covered are domestic terrorism or any losses that occur outside the U.S. And while an act of terrorism that results in direct property damage to commercial buildings and business personal property is now covered, indirect losses will most likely be borne by the business – unless covered by other policies.

Much has been written about the terrorism exposure at our ports. An act of terrorism at a major port such as Boston would create a financial that would spread worldwide. The key to understanding the impact of The Risk Insurance Act on ocean cargo lies in understanding how coverage for terrorism is granted under a cargo policy. 

The basic cargo policy excludes terrorism under the Strikes, Riots and Civil Commotion warranty. Terrorism coverage can be granted by adding the SR&CC endorsement, but prior to Sept. 11, re-insurers became concerned with the accumulation of exposure in distribution centers, warehouses or other places when the goods were no longer in normal course of transit. The reinsurers added an exclusion to all treaties eliminating coverage for terrorism when the goods were not in normal course of transit. As a result, terrorism coverage applies only to goods in normal course of transit.

Insurance policies typically cover direct loss to property at specific locations or in the course of transit. Loss of income and extra expense exposures are usually tied to specific commercial property locations. The contingent business income loss resulting from damage to a customers' or supplier's location is seldom insured. The contingent loss at a major port is also an uninsured exposure. The economic loss, contingent business loss, market delay are loss exposures that are retained by the business.

Insurance policy terms, conditions, insuring agreements and standard policy exclusions trump the Terrorism Act. For example, if a terrorist destroys a dam and the resulting floods generate catastrophic property losses, the terrorism act does nothing unless you have flood insurance. And a terrorism act at a nuclear power plant may still be excluded by the absolute nuclear exclusions found in almost all policies.

Art Bruinooge is the president of the Sadler Insurance Agency, Inc. He is a past president of the New Hampshire International Trade Association and a member of the New Hampshire International Trade Advisory Committee.